THE ISA LOWDOWN

The
Isa, or Individual Savings Account to give its full name, is a way of
earning tax-free interest and investment profit. You don’t pay any
income tax on the interest and there’s no capital gains tax on any
profits.

Where you put your Isa money is up to you. You’ve a choice of cash or investment, or a mix of the two, but the total you can put out of the taxman’s reach is £10,680 in this tax year, which ends on April 5. While you can invest this full amount in investment funds or stocks and shares, only half — £5,340 — can be put into cash.

Fail to use your yearly allowance, and it’s gone for good.

The minimum age to open an adult cash Isa is 16, but you need to be at least 18 to invest in stock market funds.

There are 15.4 million Isa accounts, with an eye-popping £385 billion invested. Of these, 11.9 million are cash Isas and 3.4 million shares Isas.

There is roughly £192 billion in each.

If you invested the maximum Isa allowance every year since they were launched in 1999, you would have saved £98,280 free of tax — not including any investment growth.

And even if you’ve used up this year’s allowance, it’s worth finding out which are the best deals in readiness for the new tax year. This begins on April 6 and the Isa allowance increases to £11,280.

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CASH ISAS

IF you’re serious about saving, you must have a cash Isa. The average cash Isa has about £3,190 in it, HMRC says.

With Bank of England base rate at a record low of 0.5 per cent for three years, and inflation running high for more than a year, tax-free interest can make a huge difference.

Normally, every £1 interest earned in a savings account has 20 per cent taken in tax, so you receive just 80p.

However, higher-rate taxpayers who pay 40 per cent income tax, and top-rate tax payers who pay 50 per cent, get even less interest. But keep it in a cash Isa and every pound of interest stays in your account.

Money in a cash Isa is protected by the Financial Services Compensation Scheme, which guarantees up to £85,000 if a bank or building society collapses.

There are 298 cash Isas on offer. To help you get started, we’ve compiled a table of the best buy cash Isas for this tax year: the best for easy access, for transferring money in, and the top fixed-rate deals.

To apply for a cash Isa you will need to approach the bank or building society directly. You will also need your National Insurance number and identification — usually a passport and some bills.

INVESTMENT ISAS

A stocks and shares Isa, or equity Isa as they are also known, allows you to invest in the shares of individual companies, or in funds.

Investment funds are baskets of shares picked by a fund manager who will specialise in selecting certain types of companies.

There are thousands of investment funds, split by region and by how much risk they take with your money.

As equity Isas are stock market investments, there is always the risk you could lose money.

The benefit of investing in an Isa is that normally any returns you make over £10,600 would be subject to capital gains tax of 18 per cent for a basic-rate taxpayer and 28 per cent if you are a higher earner.

Funds which pay a regular income are also subject to income tax — just like interest in a savings account.

And if you invest in shares, dividend payments are normally taxed at 10 per cent for basic rate payers, 32.5 per cent for higher rate payers, and 42.5 per cent for top rate taxpayers. But you avoid all these taxes in an Isa.

A ‘self-select’ Isa, which lets you invest directly in shares, is more risky because your money isn’t as widely diversified. It’s more costly, too.

If you had put in the maximum allowed into an investment Isa since launch in April 1999 and seen average annual growth of 5 per cent, today you’d have £137,523, according to calculations by investment brokers Hargreaves Lansdown.

Make sure the adviser is qualified to give investment advice and can advise on a range of funds — not just those from a limited number of companies.

It’ll be worth paying an upfront fee for advice rather than relying on commission, as this way all of your money is put into your fund.You can pay money in monthly, or as a lump sum once a year.

BEWARE THE COSTS

When you put your money into an investment fund, you will be charged a fee. There can be an initial charge to buy into the fund, often 5 per cent of the money you invest. On top of this, there will be an annual management charge. This will vary from 0.3 per cent for a tracker fund to 2.5 per cent for a more complicated fund.

Odd as it may sound, it’s not cheaper to go to the fund managers directly.

Instead, fund supermarkets and discount brokers — such as those we’ve already recommended — allow you to waive the initial charge, or at least most of it.

WHERE TO INVEST

Essentially these fund names tell you who the company is (i.e. Aberdeen Asset Management), what the objective of the fund is (Cautious managed), and, sometimes, which country they invest in (the UK).

But this is still pretty much incomprehensible jargon.

So, to help further, each fund has a fact sheet which tells you specifically what the fund manager is trying to do, how they have done recently, and even the actual names of some of the companies the fund has bought shares in.

The fund for you will be the one best placed to match your long-term goals says Justin Modray, founder of financial advice website Candidmoney.

He says: ‘Simply trying to pick a fund that’s going to be the best-performing fund in a given year is not the way to go, however tempting it sounds.

‘It will be far better to pick a fund that aligns with your investment goals, and then pay attention to its health and make sure you monitor it as just one part of your overall finances.’

A key to this is realising how much risk you want to take with your money. This means deciding if you can afford to lose money (or calculating how much), and being clear about why you’re investing.

Think of investing like booking a holiday. The more remote and uncharted the destination, the more likely it is something will go wrong. But if it goes well, it could be the trip of a lifetime.

Stay in the UK, and it may seem a little dull, but you’ll be totally familiar with culture and the trip will be more likely to live up to your expectations.

WHAT TO INVEST IN

If you are very cautious — that is, you don’t mind not making big profits, but are more concerned about losing money — then Darius McDermott, of discount fund broker Chelsea Financial Services, suggests a UK equity income fund.

This means the fund invests in the shares of UK companies that pay a dividend, which you can either take as income or reinvest.

He says: ‘The funds are investing in stable, solid businesses which have a history of churning out good dividends.’

These companies are often giants in their sector — for example, telecoms provider BT, pharmaceutical company GlaxoSmithKline, oil firm BP and insurer L&G.

Last year, the income paid by companies to shareholders shot up by nearly a fifth to £67.8 billion, according to analyst Capita Registrars. Ben Yearsley, investment manager at Hargreaves Lansdown, also backs UK equity income funds for lower risk investors. He recommends Invesco Perpetual Higher Income fund, run by Neil Woodford.

For those prepared to take a higher risk, investing in countries with fast growing economies, such as South Korea, Malaysia and Vietnam, is the place to be, adds Mr McDermott.

He says: ‘Over the longer term, we think Asia’s growing power and economic influence will play a huge part in world growth.’

He suggests First State’s Asia Pacific Leaders fund and Aberdeen Emerging Markets fund — both invest in companies such as electronics giants Samsung and Taiwan Semiconductors.

Other favourites for investment include fuel companies, with First State picking Hong Kong and China Gas company, and Aberdeen opting for Petrochina.

CHECKING YOUR FUNDS

Once you have invested money you need to check how it’s doing at least twice a year.

Compare your picks with how rival funds are doing.

This is Money's funds data sectiongives a full rundown of fund and investment trust performance Websites such astrustnet.com or morningstar.com let you compare like-for-like figures.Don’t worry about how it does over the short-term, as all stock markets fall occasionally. And don’t expect your fund to be the best all the time.

It’s important to remember what you set out to achieve. But, obviously, if your fund consistently loses money over three years, compared to peers, then it’s time to move on.